Draft Victorian Default Offer – a zero sum game

Victorian Default Electricity Offer Zero Sum Game

The Victorian Essential Service Commission (ESC) on Friday 8th March released advice to the government to establish a Victorian default electricity offer (VDO). There’s big claims around savings. But will the VDO make any difference to how much Victorians spend on electricity? Or is it just a zero-sum game?

A safety net with loopholes

The VDO would replace “standing offers” from 1 July 2019. Customers who have never shopped around will be transferred automatically from their present ‘standing offer’ on to the VDO. This could mean an annual saving of $390 to $520 pa for households still on standing offers. But it’s unlikely this will happen. This is because retailers could very quickly move all their customers from standing offers to ‘market offers’ that only are a tiny bit better. There is no obligation for market offers to be lower than the Default Offer, so the promised savings are in no way assured. The ESC acknowledge that consumers can pay for higher priced plans, meaning that VDO is not much of a safety net.

Customers can also request that their retailer move them to a cheaper VDO plan. Of course, you’d need to be an engaged energy customer to do this, which isn’t the people who find themselves in this predicament. For those on a competitive market plan who pay their bill on time – there’s no likelihood of savings. And they could discover in future that retailers won’t be offering the same level of deals.

What problem is the VDO trying to fix?

In the report, the ESC talk about a ‘loyalty tax’ that is being applied to consumers who stick with their current retailers and ‘fail to shop around’ for a better deal. While there are a few retailers who have all of their customers on their best deal all of the time, the majority don’t. Most retailers offer lower cost plans with 12-24 month benefit periods. Once that period is up, the retailer may not extend that good deal. The customer may be offered a lower discount or worse, transferred to their highest cost standing offer. Retailers follow this tactic to win more new customers by offering cheaper deals but hope that customers will stay around on higher priced plans over time.

Loyalty tax or something else?

The phenomenon of retailers charging less engaged customers more is a common practice. You’ll see it across almost every industry from banking to insurance, to mobile phones and internet ISPs. Keen shoppers are rewarded with better deals. If customers choose to stay loyal to the same brand and ignore that others offer a similar or an identical service for a lot less – they’ll be forever paying more.

So is it really a loyalty tax, or a disengagement tax. The vast majority of consumers – 80-100% depending on the retailer – are on market offers which are generally cheaper than the proposed Victorian Default Offer. Many consumers on market offers are loyal customers of a retailer who are engaged enough to stay on the better deals offered by their retailer. These consumers either take up the renewal offers when benefit periods expire or check every year or two that they are still on a good deal with services like WATTever.

If the VDO cuts electricity costs, isn’t it all good?

The new Default Offer will reduce the cost of electricity for those households still standing offers. But come July 1, it’s likely there won’t be many left on standing offers, so the savings won’t be as large as forecast. If retailers lose revenue from disengaged customers they will need to find elsewhere else. The cold reality is that retailers won’t give up their profits. Because the energy market is a zero-sum game with the number of customers in the market stable and the use of energy stable (and declining with more home solar) they’ll need to cut costs or hit someone else. The most obvious target will be the other customers not on the VDO i.e. their engaged customers, regardless of their loyalty.

So what’s a possible result? Those that shop around could find good deals becoming more expensive. In a changing electricity market where consumers are increasingly taking an active role this could send the wrong signal. That your efforts don’t matter and won’t be rewarded. Solar owners, battery owners and engaged consumers can help the industry cope with the significant changes that are happening as we moved to higher penetration of renewable energy in the coming decades. To promote greater efficiency we should be rewarding customers who make an effort. By reducing the opportunities for engaged consumers to make savings, we risk many of them becoming disengaged.

What about vulnerable consumers?

Helping genuinely vulnerable consumers to access affordable power is essential. However, the proposed VDO doesn’t target vulnerable customers. The VDO supports any customer that hasn’t shopped around, including the wealthy who are simply disengaged.

There are already targeted measures in place to support vulnerable consumers in the form of various concessions from state Governments. In addition, there are an increasing number of plans from retailers targeted at Seniors that provide low ongoing rates.

Rewarding loyalty – can it happen?

Currently, no retailers offer any plans that I would consider as rewarding loyalty i.e. the longer you stay with the retailer the lower the electricity price gets. Some offer rewards schemes but the value of these rewards doesn’t increase with your tenure as a customer. Generally there are very few industries where loyalty is rewarded – not discounts or rewards for greater expenditure – I mean discounts for longevity as a customer. One of the few examples I know of is NRMA insurance. As your unbroken tenure with the NRMA increases your policy discounts increase every five years of tenure up to 25 years. As an NRMA customer I value that discount but I still check on every renewal whether there are better options out there. Without that loyalty discount I would likely have left years ago.

Could an electricity retailer offer such a discount? Why not? They would certainly get some good publicity that will resonate with those who value being rewarded for their loyalty.

What now for the VDO?

The VDO is now in a consultation period. Stakeholders are giving feedback. I’m cynical about this because while good and bad ideas are raised, ultimately the politicians will decide which will go ahead. Too often the easy options that grab media headlines are chosen, while the things that will make a profound difference, rarely see the light of day.

In my opinion, the VDO is an idea that will:

  • make no long term difference to the average cost of electricity in Victoria
  • make no long term difference to the profit margins of retailers, networks or generators
  • risk leaving vulnerable and disengaged consumers on overpriced ‘market offers’ that are only marginally better than current standing offers
  • potentially, penalise engaged consumers including solar owners through higher rates.

Editors note: As of 11th March 2019, WATTever’s partner retailers – Energy Locals and Diamond Energy – offer the same rates to new and existing customers and do not have plans with expiring discounts.